The month of February has been a continuation of what we saw throughout January, with gains being registered on major indices week after week.
*Equity Indices - FTSE Global Indices in CAD as of 01 March 2019, Bonds - Barclays Global Aggregate Canadian Float Adjusted Bond Index as of 28 February 2019.
The sharp turn around experienced in equities markets provides a great example of how difficult it is to try and time them. The recent rebound from the December lows can be attributed to trade optimism, central banks becoming more accommodative, and stimulative developments out of China.
The Canadian equities market has had a strong start to 2019, with the S&P/TSX finishing February up 11.7% year-to-date. However, these gains are partially offset by a weaker dollar and don’t paint an accurate picture of the current Canadian landscape. In the Bank of Canada’s communication on Canada’s interest rate outlook, Governor Stephen Poloz stated that any future hikes are highly uncertain and cited concerns that consumers are very indebted, which is a sentiment we share given how leveraged Canadian households are.
Fourth quarter GDP results showed signs of a healthy yet moderating economy. Consumer and business spending were positive contributors, while trade and residential investment acted as a drag. The Federal Reserve has continued to communicate a more patient accommodative stance. The combination of solid economic data, signals of the Fed becoming more accommodative, and positive news on the trade front have all helped the US markets close the month up 11% year-to-date (in CAD terms).
Signs of a weakening economy persisted in Europe. Europe is treading in contraction territory due to a slowdown in Italy and Germany. The European Central Bank has indicated they will take policy action to address the slowdown. In the UK we are fast approaching the March 29th Brexit deadline to leave the European Union. Since a clear path has yet to be established, it seems most likely that British politicians will look for an extension to the deadline.
Chinese policymakers are injecting a mix of stimulus into the economy to support growth through fiscal and monetary measures. These measures have helped boost performance in Asian equity markets and improved market sentiment towards these regions.
Throughout the month President Trump announced that trade talks have been going so well that he was comfortable extending the March deadline to an unspecified date and would not increase tariffs during this time. Due to the complexity of the items being negotiated, we expect it to take some time before a final agreement is reached. However, US Trade Representative Robert Lighthizer provided a warning that a trade agreement remains a matter of “if,” not “when.” We will continue to monitor developments between the world’s two largest economies as a new arrangement takes shape.
Although we have seen some softening in the data globally. We believe there is still reason for optimism, those include: Central banks becoming more dovish (accommodative), positive developments on the trade war front (though a complete deal with need to be reached for a meaningful impact), and China’s stimulus. These developments provide a strong case that the rebound we have seen is not an anomaly and they will in large part contribute to corporate profitability. At the end of the day, we see no evidence to conclude that the volatility we’ve seen will subside and we expect month-to-month and day-to-day swings to continue as this modern political environment continues to show its colours.